International Client Alert, November 2006

BIS Fines EP Medsystems For Filing Voluntary Disclosure

A settlement agreement entered into between EP MedSystems and the Bureau of Industry and Security ("BIS") on November 3 does little to refute the common wisdom that companies should never file a voluntary disclosure with BIS unless they are almost certain that BIS will otherwise discover the problematic export.

At issue are six shipments of seven items of heart monitor equipment valued at $510,590. The equipment was shipped by EPMed to Iran between March 2001 and April 2004 without a license. Shipments of these devices after July 26, 2001 would have been permissible under the Trade Sanctions Reform Act of 2000 provided that a BIS license had been obtained. Five of the six shipments in question occurred after that date. The company agreed to settle the charges for payment of a fine of $244,000.

The company filed two voluntary disclosures relating to the shipments. The first was a preliminary disclosure that was filed on October 13, 2003, approximately two weeks after one of the shipments at issue had taken place. The second was a final disclosure which the company filed on November 20, 2003. Normally it would have been significant mitigating factor that most of the shipments described in the voluntary disclosure would have been granted a license if an application had been filed. BIS, however, paid no attention to that factor and, instead, focused on alleged misrepresentations in the voluntary disclosures themselves.

Four false statements in the preliminary and final voluntary disclosures were alleged by BIS. The first was the claim in the October 13 preliminary disclosure that the Company filed the disclosure "immediately" after learning of the shipments to Iran. The charging letter alleged that this was false because the company first learned of the shipments based on one email dated May 22, 2003, between unnamed EPMed officials A five-month delay is, perhaps, not immediate, but it hardly seems a sufficient justification for a significant fine for misrepresentation. Moreover, it may well have been the case that the Company had not yet discovered the May email or other earlier documents when it filed the preliminary disclosure in October.

Second, the charging letter took issue with the claim in the initial October 13 voluntary disclosure that the company did not know before October 2003 about the exports to Iran. This claim is also based on that single email in May 2003 between unidentified company officials and which the company may not have discovered at the time of the preliminary disclosure.

The third false statement pointed to in the charging letter allegedly occurred in the final version of the voluntary disclosure filed on November 20. According to the BIS charging letter:

In its disclosure EPMed stated that it "has no record of ever having sold any of its products to any customer in Iran." This statement, representation or certification is false or misleading because, at the time it was made, EPMed had in its possession a number of documents indicating that the company had sold its products to Iran. These documents include an email between EPMed officials dated on or about May 22, 2003, which listed five hospitals that were operating EPMed equipment.

This is a confusing allegation since the preliminary voluntary disclosure made by the Company on October 13 appears to have indicated and admitted that the Company had such records. Indeed, how could the Company have made either the preliminary voluntary disclosure or the final one without such records? Here it looks like BIS’s charge either takes the sentence in question out of context or deliberately misreads it.

Fourth and finally, the BIS charging letter attacks a statement in the final voluntary disclosure that its European Sales Manager was "totally unfamiliar with the U.S. Government restrictions on exports to Iran." This statement was false, according to BIS, because the European Sales Manager "had been informed of the U.S. embargo of Iran and knew that certain equipment required a license for export to Iran." Again, BIS seems intent on stretching the likely meaning of the voluntary disclosure to find a misrepresentation in it. What was likely meant by the disclosure was not that the sales manager didn’t know that the U.S. forbade shipments to Iran. Rather, it seems likely that the company was truthfully representing that the sales manager didn’t know that U.S. law was violated by a company shipment to a German distributor who then shipped the goods from Germany to Iran.

So what lessons should be taken away from this? First, it remains clear that companies file voluntary disclosures with Commerce at their peril. Second, and more significantly, if a company feels that a voluntary disclosure is prudent (because, for example, discovery of the violation by BIS is likely), then the company should not file a preliminary voluntary disclosure under any circumstances. The danger of such a preliminary disclosure is that subsequent discoveries can later be used by BIS to claim that the initial disclosure constituted a misrepresentation. Third, and this should almost go without saying, if a company does file a voluntary disclosure, it should be careful that everything in it is accurate.

The Office of the U.S. Trade Representative ("USTR") is seeking comments on the operation, implementation, effectiveness and compliance of free trade agreements regarding telecommunications products. The purpose of the request is to determine whether parties to free trade agreements are acting inconsistently with the terms of those agreements with respect to telecommunications products.

USTR is requesting comments with respect to the following issues: (i) whether any members of the World Trade Organization ("WTO") are acting inconsistently with their obligations under the General Agreement on Trade in Services or any other obligations; (ii) whether any of the parties to multilateral or bilateral free trade agreements with the United States have failed to comply with their obligations under those free trade agreements; (iii) whether any country has failed to comply with its obligations under other telecommunications trade agreements such as Mutual Recognition Agreements; (iv) whether there are any unresolved issues from USTR’s previous reviews of telecommunications trade policy; and (v) whether any measures or practices undertaken by the United States’ trading partners impede access to telecommunications markets or deny telecommunications services.

On October 3, 2006, the U.S. Department of Commerce ("Department") published a notice of a decision significantly expanding the coverage of antidumping duties on candles imported from China. The effects of this decision will extend throughout the retail industry. To give some idea of the amount of candles at issue, in 2004 the United States imported approximately $220 million worth of candles from China. Approximately 13% by volume of those imports were subject to antidumping duties before this expansion.¹ The expanded order will cover most of the remaining imports. Since 1986 the United States has had an order on Certain Petroleum Wax Candles from China imposing antidumping duties on all imports of such candles. Until October 3, Commerce had interpreted the order to include only candles composed of at least 50 percent petroleum wax, including paraffin. With the October 3 decision, however, the duties now apply to candles containing even one drop of petroleum wax.

Because a finding of injury and dumping are required before antidumping duties can be imposed, the Department does not have the authority to expand the scope of an order beyond its original boundaries. The Department may, however, clarify that scope and in certain circumstances it may take action to prevent the circumvention of an antidumping order through the importation of product that is sufficiently similar to the products covered by the order that, had the circumstances existed, it would have been included in the original investigation and order.

There are two methods by which the Department may clarify the scope. It may undertake a scope inquiry or it may conduct a circumvention inquiry. Because the two are closely linked, the Department has issued one regulation for the two inquiries. The regulation provides that the Department will first determine whether the answer to the question of whether a specific product is within the scope is obvious from the description of the scope in the order, from the investigation, and from subsequent rulings by the Department. If those sources are dispositive, then the Department investigates no further and issues a ruling. If it is not dispositive, then the Department will investigate the issue further before making a ruling.

A decision that is found merely to "clarify" the existing scope will be applied retroactively back to the date of the issuance of the order, even though the goods have already cleared Customs and final duties have been paid. Nevertheless, such clarifications will not require the Department or Customs to reopen the issue regarding specific completed imports. Moreover, because the decision is only a clarification of the existing scope, the original findings of dumping and consequent injury to the domestic industry are presumed to apply to these additional imports. Antidumping duties cannot be assessed without a finding of dumping and consequent injury to the domestic industry producing a product "like" the imported product subject to the duties.

Over the years the Department has issued numerous scope rulings finding that the record of the case was dispositive that the scope of the order did not include candles containing less than 50 percent petroleum wax. In 2005, at the request of most of the original petitioning U.S. industry, the Department initiated two inquiries to consider whether imports of candles composed mostly of vegetable wax but containing some petroleum wax were circumventing the original order. As a justification that its previous findings that the investigation and subsequent decision dispositively indicated that majority vegetable wax blended candles were not within the scope of the order no longer held, the Department relied on a 2004 review of the injury finding by the U.S. International Trade Commission ("ITC"). In 2005, although it had instituted the circumvention inquiries, the Department issued two more scope rulings finding that majority vegetable wax candles were not within the scope of the order.

The 2004 ITC review did not consider whether imports of the blended, or majority vegetable wax candles injure or would injure the domestic industry. The ITC was not reviewing whether injury existed but rather seeking to determine whether injury was likely to continue or recur if the antidumping duty order were revoked. Moreover, the ITC specifically excluded imports of blended candles from its consideration of this question. Based on the Department’s scope rulings, the ITC considered such candle imports to be outside the scope of its review. Indeed, one basis for finding that injury was likely to resume if the order was revoked was the ITC’s conclusion that Chinese candle makers would likely switch production from non-subject blended candles to subject petroleum wax candles if the order were revoked. Moreover, the two scope rulings that the Department issued subsequent to the initiation of the circumvention inquiries found that the record was still dispositive that such candles were excluded from the order, even though the 2004 ITC decision was part of that record.

The result of the Department’s finding is that a much larger portion of imports of candles from China are now subject to antidumping duties, which has several implications for the market. First is the role of the Continued Dumping and Subsidy Offset Act ("CDSOA" or the "Byrd Amendment"). CDSOA provides that antidumping duties collected shall be distributed to qualified domestic producers. The issue of what constitutes a "qualified domestic producer" has limited the number of companies that receive funds under CDSOA. Given the value of imports at issue in the candles case, the CDSOA money is considerable. In 2004, $51 million were distributed to 10 domestic candle makers, although the ITC found that there were about 400 domestic candle makers. One company received over $26 million of those funds in 2004. While CDSOA will not apply to any imports entering the United States after September 31, 2007, the funds available will continue to accrue until then and will be paid out on those prior imports for years after that date as final duties are determined and paid. The antidumping duty rate applied to imports of subject candles is currently 108 percent. So with $220 million in imports in 2004, if approximately 70 percent were subject to the duty,2 that would mean approximately $166 million would become available for distribution to qualifying companies under CDSOA. Such a large amount of money distributed to only a few U.S. producers could drastically harm the competitiveness of the U.S. companies that do not receive the funds.

Another likely consequence is that, given the volume and money involved, most likely the decision will be challenged in court. There are clear questions as discussed above whether this decision is consistent either with the Department’s regulations that state that if the record is dispositive the inquiry goes no further, and whether the Department’s interpretation of the law expanded rather than clarified the scope of this order.

Another possible consequence would be a challenge by China under the World Trade Organization ("WTO") Agreement. The WTO Antidumping Agreement does not includes provisions similar to the U.S. law’s provisions for circumvention requirements and it is unclear whether the Agreement would consider the duties imposed on blended candles to have been imposed after a finding of dumping and consequent injury. It is unclear that the Antidumping Agreement would permit the presumption that U.S. law makes that the existing dumping and injury findings applied to the products in the "clarified" scope.

Aside from the legal disputes related to the decision, the increased coverage of candles may lead to several market shifts, from possible increases in prices of candles to shifts in supply away from China. Such a shift away from China does not necessarily mean a shift in supply to U.S. producers; many countries produce candles in commercial quantities. Moreover, increased prices for a candles could lead to reduced consumer demand for them or, for those who purchase candles because of their ability to scent the air around them, there may be a shift to scented oils rather than candles. In any event, it will be several years before the consequences of this decision can be known with certainty.

On October 13, 2006, officials of the U.S. Securities and Exchange Commission (the "SEC") and the Department of Justice (the "DOJ") announced the resolution of their investigations into violations of the U.S. Foreign Corrupt Practices Act (the "FCPA") by Norway’s Statoil, ASA. Norway’s largest oil company acknowledged making bribes, disguised as legitimate consultant payments totaling $5.2 million, to a senior Iranian oil official in order to secure valuable oil and gas rights in Iran. Statoil agreed to pay a total of $21 million in criminal penalties and disgorgement of profits and to enter into a three-year deferred prosecution agreement, which required the retention of an independent compliance consultant for the duration of that period. The FCPA prohibits U.S. companies and certain foreign companies (including those whose securities are traded on U.S. stock exchanges) from paying bribes to foreign government officials in order to obtain or retain business. The FCPA also requires companies traded on U.S. stock exchanges to keep accurate books, records and accounts and to maintain strong internal accounting controls. The DOJ and SEC have jurisdiction over Statoil’s conduct because the company’s securities – specifically American Depository Receipts – are traded on the New York Stock Exchange.

The United States has maintained numerous sanctions against Iran since 1979 (e.g., ban on U.S. persons’ travel to, trade and financial transactions with Iran, ban on U.S. companies’ participation in Iran’s energy industry, etc.), but until recently European companies have been free to do business in Iran. Six years ago, Statoil’s then CEO Olav Fjell, decided to extend the company’s international operations and directed Statoil’s senior executive for international exploration and production, Richard Hubbard, to secure oil and gas contracts in Iran.

In the Spring of 2001, Hubbard traveled to Iran to meet with Mehdi Hashemi Rafsanjani ("Hashemi Junior" or the "Iranian Official"), the head of the Iranian Fuel Consumption Optimizing Organization, a subsidiary of the National Iranian Oil Company ("NIOC"). Hashemi informed Hubbard that his father was Ali Akbar Hashemi Rafsanjani, former president of Iran, and then-head of the Expediency Council, leading Hubbard to believe that he could influence the award of Iranian oil contracts. Hashemi inquired whether Statoil would consider paying a "success fee" if he assisted Statoil in securing energy contracts in Iran. Statoil subsequently tested Hashemi Junior’s purported influence by, among other things, requesting that he send a message back to Statoil through the Iranian Oil Minister. Subsequently, Statoil employees determined that Hashemi Junior was an advisor to the Oil Minister, and confirmed their understanding that the Rafsanjani family was highly influential in the oil and gas business in Iran. Statoil employees were also aware of allegations reported in the media that the Rafsanjani family was involved in corruption but did not investigate the allegations.

Having determined that an arrangement with Hashemi Junior would be advantageous, Statoil invited him to visit Statoil’s headquarters in Norway where he met with Statoil’s senior management. At the end of 2001, Hashemi Junior reciprocated with an invitation to Statoil to bid for a subcontract to develop the South Pars natural gas field, one of the world’s largest with 800 trillion cubic feet of reserves. The prime contract for the South Pars project had been awarded to an Iranian state-owned oil and gas development company. In 2001 and into 2002, Hubbard discussed with CEO Fjell the possibility of a consultant agreement with the Iranian Official that would provide for a "success fee" payable upon the award of a subcontract to Statoil on the South Pars project. Fjell ultimately approved a consultant agreement that called for two payments in the amount of $200,000 prior to any award of a subcontract, $5 million upon the award and an additional $10 million to be paid over 10 years. On June 12, 2002, Statoil entered into a consultant agreement with Horton Investment, a consultant company registered in the Turks and Caicos Islands whose apparent owner was an Anglo-Iranian businessman named Abbas Yazdi who lived in London. Hashemi Junior was not named as a party to the agreement.

On May 15, 2002, Statoil entered into an agreement in principal with the Iranian prime contractor for the South Pars project that provided essential terms for Statoil’s participation as a subcontractor. In June 2002 and January 2003, Statoil paid two invoices issued by Horton Investment for a total of $5.2 million directing the payments to a Swiss bank account held by a third company not named in the consultant agreement. The DOJ and SEC documents indicate that the payments were routed through a New York bank.

Because the payments were sizeable and the recipient was not named in the consultant agreement, the payments came to the attention of Statoil’s internal auditors who conducted an investigation and concluded that there was "a strong indication of the consultant being involved in corrupt-like practices," and that the consultant agreement may have violated Norwegian and U.S. anti-bribery laws. Despite the internal auditing report, Statoil’s board and senior management did not take any steps to address Statoil’s relationship with the Iranian Official apart from suspending further payments under the consultant agreement. In September 2003 Statoil finally terminated the consultant agreement after the arrangement with the Iranian Official was leaked to the Norwegian press. The public scandal caused by the media reports resulted in the resignations of Richard Hubbard and then-Chairman of the Board Leif Terje Loeddesoel. CEO Olav Fjell was fired by the remaining directors.

On September 11, 2003, the Norwegian special economic and environmental crime police unit ("Økokrim") raided Statoil’s offices as part of its investigation. On June 29, 2004, Økokrim fined Statoil in the amount of NOK 20 million (approximately $3 million). The new Statoil management fully cooperated with the investigations by Økokrim, the SEC and DOJ. Statoil turned over to the SEC and DOJ all relevant documents, including those covered by the attorney-client privilege (purportedly without fully waiving the privilege), allowed full access to its employees and agreed to pay for its employees’ travel expenses and attorneys’ fees associated with interviews by the DOJ and SEC. The Board of Directors implemented remedial measures.

On October 13, 2006, Statoil negotiated a resolution with the DOJ and SEC of the following charges: (i) violating anti-bribery provisions of the FCPA, (ii) violating the books and records provision of the FCPA by mischaracterizing bribes as legitimate "consultant fees for special consultants and analyses relating to technical, administrative, tax, and financial matters"; and (iii) failing to implement sufficient internal accounting controls. The DOJ and SEC each imposed a $10.5 penalty on Statoil. However, $3 million of the $10.5 criminal penalty imposed by the DOJ was deemed satisfied by a penalty that Statoil had previously paid in Norway, so that the total amount Statoil must pay to the U.S. enforcement authorities is $18 million. This is one of the largest fines imposed by the SEC and DOJ for FCPA violations, the record fine being the $28.5 million imposed by the two agencies in 2005 against Titan Corporation for bribing foreign officials in the Middle East and Africa.

The DOJ and Statoil have also entered into a three-year non-prosecution agreement providing that, subject to Statoil’s compliance with the terms of the agreement for the entire three years, DOJ will dismiss the criminal charges. The requirement that Statoil retain an independent compliance consultant for the term of the agreement could prove costly and disruptive to Statoil’s business. The compliance consultant will be given authority to probe, at Statoil’s expense, all Statoil’s operations and procedures that have any relationship to Statoil’s business outside Norway. Although Statoil will pay the compliance consultant’s fees and expenses, the relationship will not be protected by the attorney-client privilege. The compliance consultant will conduct three comprehensive reviews and make recommendations to improve Statoil’s program, policies, and procedures for ensuring compliance with the FCPA. Statoil will have 120 days to implement the recommendations, from which it can deviate only under limited circumstances.

The compliance consultant will report any FCPA violations to the Statoil’s compliance officer, its audit committee and its outside counsel, and, in its turn, Statoil will be required to report any discovered violations to the DOJ and SEC. Under certain circumstances, the compliance consultant will be able to report discovered violations directly to the DOJ and SEC without informing Statoil. Moreover, the compliance consultant would be permitted to report any other criminal or regulatory violations by Statoil that it discovers even if such violations have nothing to do with the FCPA. To ensure the compliance consultant’s independence, the consultant will be prohibited from working for Statoil in any capacity for two years after expiration of its mandate.

A surprising aspect of the Statoil case is senior management’s active participation in the bribery scheme despite FCPA enforcement activity in recent years. That being said, the case demonstrates the long reach of the FCPA – any non-U.S. company whose securities are traded in the United States may come under the close scrutiny of the U.S. enforcement agencies. As demonstrated by Statoil’s experience, the penalties imposed in the United States may substantially exceed the penalties imposed in the home jurisdiction. The DOJ documents appear to emphasize the routing of the illicit payments through a New York bank account. However, it is not yet clear whether processing the bribe monies through New York banks would be sufficient for the DOJ to assert jurisdiction over non-U.S. companies not otherwise subject to the FCPA.

The payment of the fines will not be the end of this ordeal for Statoil. Any violation of the FCPA discovered in the next three years or any other violation of the deferred prosecution agreement with the DOJ would allow the DOJ to reinstitute prosecution against Statoil for the bribery in Iran beyond the penalties already imposed. Finally, while the cost and potentially disruptive impact of the compliance consultant’s operations on Statoil’s business are difficult to estimate; they may well be significant, given the scope of the compliance consultant’s mandate and the fact that it will owe no loyalty to Statoil.

One business day after imposing $21 million in fines on Statoil for FCPA violations, the SEC and DOJ announced the resolution of another multimillion dollar prosecution for foreign bribery. On October 16, SSI International Far East, Ltd. ("SSI Korea"), a South Korean wholly-owned subsidiary of Schnitzer Steel Industries, Inc. ("Schnitzer"), pled guilty to violating the anti-bribery and books and records provisions of the FCPA, conspiracy and wire fraud. Schnitzer entered into a separate deferred prosecution agreement with the DOJ and agreed to retain an independent compliance consultant for a three-year period. For its part, SSI Korea agreed to pay a $7.5 million criminal fine while Schnitzer agreed to disgorge ill-gotten profits and pay prejudgment interest totaling $7,725,201.

Schnitzer is an Oregon-based steel company whose securities are publicly traded on NASDAQ. Schnitzer is in the business of, among other things, selling scrap metal and brokering sales of scrap metal for other companies. DOJ and SEC documents establish that from 1999 through 2004 Schnitzer and SSI Korea paid over $205,000 in cash kickbacks and gifts to managers of government-controlled steel mills in China to induce those managers to purchase scrap metal from Schnitzer. Schnitzer realized $6,259,104 in net profits on the sales facilitated by the bribery. SSI Korea served as a conduit for bribes paid by certain Japanese scrap metal companies for sales in China that SSI Korea brokered. SSI Korea realized $19,991 in net profits from brokerage commissions paid by Japanese companies for tainted sales. The illicit payments to the managers of Chinese steel mills were mischaracterized in Schnitzer’s accounting records as "sales commissions," "commission to the customer," "refunds," or "rebates" in violation of the books and records provision of the FCPA.

Schnitzer separately violated the FCPA by failing to provide to its employees, agents or subsidiaries FCPA training and to establish an internal FCPA compliance program.

The DOJ and SEC documents indicate that, apart from bribes paid to employees of government-controlled steel mills, Schnitzer paid over $1,693,000 in bribes over the five-year period to managers of Chinese and Korean steel mills that were privately owned. Although the FCPA does not explicitly prohibit commercial bribery (i.e., bribery of officers of privately-owned companies) as such, it does prohibit mischaracterization of such payments in the books and records of publicly traded companies. We note that Schnitzer can be separately prosecuted by state law enforcement authorities for violation of state commercial bribery statutes.

This case would have been a run-of-the-mill prosecution in the recent flurry of FCPA enforcement activity but for a few noteworthy facts. First, in 2004 the company’s compliance department investigated the practice of paying kickbacks and reported them to Schnitzer senior management. In response, a senior executive of Schnitzer prohibited any further payments. But that same executive authorized an increase in entertainment expenses in lieu of cash payments to the managers of government-owned and private customers. Thereafter, rather than making cash payments, Schnitzer employees gave the managers gift certificates and "a watch worth $2,400." FCPA prohibits both paying cash and giving "anything of value" with a corrupt intent to influence a foreign official. As Schnitzer’s compliance department had already determined that there was a corrupt intent in making cash payments; the substitution of entertainment and gift certificates for cash payments did not change the conclusion that Schnitzer was violating the FCPA.

Second, Schnitzer voluntarily disclosed the results of its internal investigation to the DOJ and SEC, and fully cooperated with their investigations. According to the DOJ, Schnitzer took "appropriate disciplinary action against individual wrongdoers, irrespective of rank; replac[ed] senior management; and [took] significant remedial steps, including the implementation of a robust compliance program." Nevertheless, the DOJ and SEC imposed on Schnitzer and SSI Korea criminal and civil penalties that are among the largest in the history of the FCPA. In addition to the cash penalties, the DOJ and SEC imposed the now standard requirement for engagement of an independent compliance consultant that will cost Schnitzer money in consultant’s fees and expenses and in disruption to Schnitzer’s business operations. It is noteworthy that the disgorgement and fines imposed were substantially greater than the sum of profits realized from the facilitated sales and the payments made. And it is perhaps ironic that in spite of such harsh punishment of the company, Assistant Attorney General Alice S. Fisher could say that "when companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations, they will get a real, tangible benefit. In fact, Schnitzer Steel’s cooperation in this case was excellent, and I believe that the disposition announced today reflects that fact."

The U.S. Department of Commerce ("Department") published its final procedures for determining when to waive antidumping and countervailing duties on supplies for use for emergency relief work on October 30, 2006. Section 318(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1318(a)) has long authorized the President to declare the importation free of duty of "food, clothing, and medical, surgical, and other supplies for use in emergency relief work," however, until now there has been no procedure to waive antidumping and/or countervailing duties in such circumstances (see the July 5, 2006 International Client Alert for a discussion of the proposed regulations and reason for such regulations). After receiving and reviewing the comments it received on its proposed regulations, the Department issued these final regulations.

The Department will only grant waiver requests in certain narrow circumstances. The President must authorize the Secretary of Commerce to waive duties in emergencies. It does not appear that the mere declaration of an emergency by the President is sufficient to trigger the waiver procedures, but rather they require a specific authorization after the declaration of the emergency. Similarly, the waiver itself will apply only for a limited period, requiring that normally the subject importation must occur within 60 days after the Secretary notifies the applicant that the request for a waiver has been granted.

In order to qualify for the waiver, the applicant must submit a request in writing to the Secretary of Commerce. That application must (1) identify the relevant antidumping or countervailing duty case number; (2) identify the producer of the merchandise; (3) provide a detailed description of the merchandise and the relevant HTS number; (4) provide the price in the United States and the quantity to be imported; (5) identify the proposed date of entry and port of entry, the mode of transportation, and the person for whose account the merchandise is being imported; and (6) any other information the applicant thinks should be considered. The Department specifically rejected requests to limit or identify the types of merchandise that might be eligible for such waivers, instead finding that this must be determined on an emergency-by-emergency basis. If the application is accepted, the Department will notify the applicant, instruct the Bureau of Customs and Border Protection to allow entry of the merchandise, and post a notice of the determination on the Department’s website.

Once the waiver has been approved, if the merchandise is not entered within 60 days of notification of the Secretary’s decision, the merchandise will be subject to the antidumping or countervailing duties that would normally apply. Moreover, if the imported merchandise is not used for the emergency relief purposes contemplated, it is subject to seizure and any other penalties applicable under Section 592 of the Act (penalties for importation by means of false or misleading statements).

Finally, the Department will review the operation of the program and issue a report on the results of its review of the first five years of the program. In particular the report will consider the impact of waivers on "U.S. parties injured by dumped and/or subsidized imports." Once the Department has conducted such a review, it may decide to revise the regulations.

On October 19, the Department of Commerce ("Department") proposed changes to the methodology it uses to value market economy inputs when calculating normal value in antidumping cases involving non-market economy ("NME") countries.

In antidumping cases involving NME countries, normal value is calculated by valuing the factors of production (i.e., inputs into the production, such as raw materials, energy, labor, overhead, and general expenses) using the prices of comparable factors from a market economy at a comparable level of economic development that is a significant producer of comparable merchandise. For production inputs that are purchased from market economy suppliers in arms-length transactions, the Department uses the average actual price paid for the input in question. For inputs that are purchased from both market economy suppliers and NME suppliers, the Department currently uses the price paid for that input from market economy suppliers as long as the volume of the market economy input as a share of total purchases from all sources is "meaningful." The Department determines the "meaningful" standard on a case-by-case basis.

The Department’s change in methodology seeks to clarify the definition of "meaningful." Its new methodology creates a "rebuttable presumption" that market economy input prices should be used to value an entire input when at least 33 percent of the total volume of the input is purchased from market economy sources. Parties in a particular case may demonstrate that the specific facts of the case outweigh the presumption, and that surrogate values should be used. If a company in an NME country does not purchase 33 percent of an input from market economy suppliers, the Department will "weight-average the weighted-average market economy purchase price with an appropriate surrogate value according to their respective shares of the total number of purchases," unless there are facts in the case to rebut the presumption that market economy prices should not be used. The new methodology is designed to add predictability as to what values will ultimately be used in an antidumping procedure, and will give parties a framework in which to advocate disregarding or accepting market economy prices for inputs. It applies to all segments of NME proceedings initiated after October 19, 2006.

The Department also revised its methodology for calculating wages in antidumping cases involving NME countries. After receiving comments regarding its proposed rule to apply a regression-based analysis using the relationship between wages and national income in market economy countries to calculate wages in NME countries, the Department has made several changes to the proposed methodology but will use a regressionbased analysis. First, the Department will use earnings data reported in Chapter 5b of the International Labor Organization’s statistics. Second, the basket of countries upon which the wage regression is based will include data from all market economy countries that meet certain criteria and that have been reported within one year prior to the base year. Third, the Department will make its annual calculation of wage rates available for public notice and comments.

In addition to the changes in methodology described above, the Department is also seeking comments on proposed changes to its approach in calculating duty drawback adjustments to export price in antidumping proceedings when a respondent producer obtains an input from both domestic and foreign sources. Currently the Department applies a two-pronged test to determine whether a party is entitled to a duty drawback adjustment: 1) the import duty paid and the rebate payment are linked to, and dependent upon, one another; and 2) there were sufficient imports of the imported raw material to account for the drawback received upon the exports of the manufactured products.

The Department has previously requested comments on the appropriate methodology to use when a duty drawback is claimed for only a portion of the exports incorporating the input in question. Based on the comments that it received, the Department now proposes to limit the duty drawback adjustment in certain circumstances. Specifically, The Department would allocate the total amount of duty drawback received across all exports that may have incorporated the input in question, regardless of their destination.

The U.S. International Trade Commission ("ITC") will be conducting a series of three investigations into trade with China. The first, announced on November 2, 2006 will address U.S.–Asia–Pacific trade and investment trends and their implications for United States–China trade. The two investigations to follow will consider the factors behind the rapid growth in United States–China trade and China’s integration with the global economy through processing trade and foreign direct investment.

The first report will discuss the main factors influencing trade and investment trends, an examination of key industries and their effect on trade and investment trends in recent years, and possibly a quantitative analysis to explain the trends. In connection with this investigation the ITC will hold a public hearing at 9:30 a.m. on March 8, 2007. Requests to appear at the hearing must be submitted by February 22, 2007. Interested parties may also make written submissions. All written submissions are due by March 22, 2007. The written submissions will be available for public inspection but confidential business information will be protected from release. The ITC has undertaken these investigations at the request of the Committee on Ways and Means of the U.S. House of Representatives.

L-3 entered into a Consent Order on October 12 with the Directorate of Defense Trade Controls ("DDTC") for export violations of its subsidiary Titan. L-3 acquired Titan in June 2005 several years after the violations had occurred. The violations at issue were the failure by Titan to report commissions paid by Titan in connection with three sales of ITARlisted items to Sri Lanka, France and Japan in 2000, 2002 and 2003 respectively.

The Draft Charging Letter starts with a recitation of Titan’s violation of the Foreign Corrupt Practices Act. As is well known by now, Titan was convicted in March 2005 for the payment of more than $2 million to the re-election campaign of the President of Benin in order to induce Benin to award Titan a contract to build and to operate a wireless telephone network. Hmmm. A wireless telephone network? Is that a defense article? Umm, no. So why is DDTC putting that in the Draft Charging Letter? The answer appears to be for no apparent reason other than to suggest that if Titan is capable of violating the FCPA, it is capable of violating the Arms Export Control Act as well. It’s a good thing that DDTC doesn’t normally have to argue things in court because this kind of argument wouldn’t make it very far in front of a real judge.

The real violations charged by the Draft Charging Letter have nothing to do with the FCPA or the Benin bribes. Instead the violations arise solely from three commissions that weren’t reported by Titan as required by Part 130 of the ITAR. The unreported commissions related to three separate export license applications to Sri Lanka, France and Japan mentioned above.

As anyone has struggled with interpreting the requirement of ITAR’s Part 130 to report commissions knows, the issue is always whether a payment to an agent is is instead exempted from reporting under section 130.5(b)(4) because it is a "payment made . . . for . . . technical, operational or advisory services, which payments are not disproportionate in amount with the value of the goods or services actually furnished." All commissions are arguably paid for technical, operational or advisory services, so the question is always whether or not they are disproportionate. Needless to say, "disproportionate" is an extremely vague standard. In one of the charged violations, the commission falls pretty far on the other side of disproportionate — $1.2 million on a $2.5 million dollar sale (48%). However, in the other two cases — $109,000 on a $870,000 sale (12.5%), and $958,000 on a $7.4 million sale (12.9%) — it is a bit harder to conclude that the payment is disproportionate.

In the Consent Order, L-3 agreed to pay a fine of $1.5 million. That fine consisted of a $1 million dollar cash payment and a $500,000 credit against the costs of the compliance program that L-3 agreed to conduct pursuant to the Consent Order. The good news for L-3, relatively speaking at least, is that DDTC agreed in the consent order to suspend the application of ITAR section 120.1(b) which made L-3 ineligible for export licenses due to its FCPA conviction. DDTC also declined to impose debarment as a penalty for Titan’s failure to report the commissions at issue.

Rising consumer insolvency has recently becoming a mounting problem for both consumers and financial institutions as well regulatory agencies in Taiwan. Credit card and cash card holders who are unable to repay their debts become so-called "card slaves" and some even commit suicide. As of December 2005, the average delinquency ratio among domestic credit card issuers in Taiwan has increased to 2.57%. Accordingly, the Judicial Yuan, the highest judicial authority in Taiwan, proposed a draft of Consumer Insolvency Act (the "CIA") to regulate individuals’ insolvency proceeding on May 5, 2006. The CIA is likely to be submitted to the Taiwanese Congress for review by the end of this year.

This article will highlight the most significant provisions of the CIA which supplement the current Taiwan Bankruptcy Law and may be of concern to U.S based financial institutions with active operations in Taiwan. The CIA provides two proceedings for insolvent individual debtors to resolve their past debts and to revive their creditability for the future – the rehabilitation proceeding and the liquidation proceeding.

A debtor who is insolvent or is likely to be insolvent and whose total unsecured debt is less than NT$10,000,000 (approximately US$322,0000) but will have consistent income may apply for rehabilitation (Article 42). The debtor shall propose his "rehabilitation" plan for the creditor’s consent and/or the court’s approval (Article 60). Upon the debtor’s completion of the rehabilitation plan, the debtor’s outstanding debts (including both unpaid claims and unclaimed debts) shall be discharged (Article 74). Nevertheless, if there is a hardship for the debtor to complete her rehabilitation plan, the court may discharge the debtor’s remaining debts once (a) the debtor has repaid three-fourths of the proposed repayment amount, and (b) the repayment amount is more than the creditors of unsecured claims and non-priority claims would have received under liquidation proceeding (Article 76).

The liquidation proceeding is similar to the bankruptcy proceeding under current Bankruptcy Law. The debtor’s assets will constitute the "liquidation estate" under which the trustee of the liquidation estate may sell or otherwise liquidate the debtor’s properties to repay the debts (Article 123). The debtor in the liquidation proceedings is subject to some restrictions with respect to his occupation, changes in his residence, and living standards (Article 85). The court shall discharge the debtor’s remaining debts upon the completion of the liquidation proceeding (Article 133).

The debtor of the residence mortgage loan may decide how to repay the mortgage loan in the rehabilitation plan without their creditors’ consent in accordance with any of the repayment terms sets forth in the Article 55 of CIA (Article 55). Rehabilitation does not affect the secured claims or priority claims according to Article 69 of CIA. However, for the residence mortgage loan, the mortgagee shall not foreclose the debtor’s collateral and shall be subject to the repayment terms in the rehabilitation plan, no matter whether such mortgagee has consented to the terms or not (Article 68).

The rehabilitation proceeding described in the CIA supplements the current Bankruptcy Law, which only provides for the liquidation proceeding. In a rehabilitation proceeding under the CIA, an insolvent individual debtor’s outstanding debts can be discharged upon the debtor’s completion of his/her repayment plan. Under the current Bankruptcy Law and the CIA’s liquidation proceeding, a debtor’s outstanding debts shall be discharged upon the completion of the liquidation proceeding.

Unlike the Means Test for the approval of liquidation under the US Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the CIA does not provide any statutory criteria for the court to decide whether a debtor shall proceed to rehabilitation or liquidation proceeding. In addition, if the court does not approve the rehabilitation plan proposed by the debtor, the court shall order the debtor to enter into the liquidation proceeding (Article 66).

According to Article 65 of the CIA, the court has the discretion to approve the rehabilitation plan without the consent of the creditors as long as none of the 12 negative events listed in Articles 64 and 65 occurs. One of the negative events is that the court may not allow the rehabilitation proceeding if the debtor’s proposed repaid amount is less than 20% of the total claims in the rehabilitation plan. If there were the possibility that the court would approve the rehabilitation plan when the debtor proposes a 20% repayment plan, it would encourage the debtor to take advantage of repaying the minimum amount to discharge all his debts. Hence, this provision may encourage a debtor to choose to invoke a rehabilitation proceeding while proposing a 20% repayment plan.

The CIA is currently being debated for submission to the Taiwan Congress. If passed, the CIA will significantly change how financial institutions should manage their consumer debt collection in Taiwan.

This Client Alert is prepared by the International Practice Group of Powell Goldstein LLP as a client service. The information discussed is general in nature and may not apply to your specific situation. Legal advice should be sought before taking action based on the information discussed.